Fed Announces Results of Study of the Payments System
First Authoritative Study in 20 Years

BOSTON, MA, November 14, 2001 -- New data collected by the Federal Reserve System suggest check writing in the United States is steadily giving way to electronic forms of payment as consumers, businesses, and financial institutions seek to be more efficient and cost-effective.

American consumers and businesses make 80 billion retail payments annually, nearly 50 billion by check and 30 billion by electronic instruments, such as credit cards, debit cards and the Automated Clearing House (ACH), according to the first comprehensive studies of the retail payments system by the Federal Reserve System in more than 20 years. Checks have declined from approximately 85 percent of non-cash payments since the last study in 1979 to about 60 percent today.

Approximately 1,300 financial institutions, including banks, thrifts and credit unions, and 89 electronic payment processors responded to three surveys that looked at methods and volumes of retail payments.

"The Federal Reserve Banks conducted the study to gain a better understanding of the dynamics of the retail payment system," said Roger W. Ferguson, Jr., vice chairman of the Federal Reserve Board, "and we believe the results clearly paint a picture of a payments system in migration. The data show strong growth in electronic payments since the early 1980s and lower than expected check volumes."

Since 1979, the total number of non-cash retail payments has doubled from approximately 37 billion to 80 billion. The number of checks has grown about 55 percent from the 1979 estimate of 32 billion. Although checks remain the dominant form of non-cash payment, over the last 20 years, electronic payments have replaced checks in large numbers.

The data collection effort was commissioned by the Reserve Banks and consisted of three main studies -- The Depository Financial Institution (DFI) Check Study, the Check Sample Study and the Electronic Payment Instruments Study. The DFI Check Study was designed to count the total or aggregate number of checks processed in the United States for a 12-month period. The Check Sample Study gathered information on the composition of the check market, namely, who (consumers, businesses or government) writes checks to whom (consumers, businesses or government) and why (remittance, point-of-sale, income or casual payment). The Electronic Payment Instruments Study gathered data on the volume and value of electronic payments processed during 2000.

The DFI check study, which gathered paid check volume and value data from financial institutions, estimates that about 50 billion checks are written annually in the United States, totaling about $48 trillion in payments. The study also revealed that approximately 30 percent of checks are "on-us" items, meaning the bank of first deposit for these items is also the paying bank. The remaining checks are cleared and settled between financial institutions.

Conducted as a complementary study, the Check Sample Study involved 149 financial institutions examining more than approximately 29,000 randomly selected deposited checks and categorizing them by type of payor, payee and purpose. The study found that consumers write approximately 50 percent of all checks and businesses receive about half of all checks. The study also established that more checks are written for remittance or bill payment, than for any other purpose (25.7 percent of check volume). The next primary use for checks was at the point-of-sale, where 19 percent of checks are written. Income payments, such as salary and benefits payments, from businesses and governments to consumers equal 17.8 percent of all check payments.

The results from the third study on electronic payment instruments show that during 2000, about 30 billion retail electronic payments were originated in the United States with a value of more than $7 trillion. Major electronic funds transfer networks, credit card associations, ACH operators, electronic benefits transfer contractors, and private label credit card issuers, 89 in all, shared data on their 2000 volume and value of electronic payment transactions.

Credit card transactions represent about half of electronic payments (15 billion, worth $1.23 trillion). Debit cards remain the second most dominant electronic instrument with 8.3 billion transactions worth $348 billion. Surprisingly, the survey revealed that while the Automated Clearing House is the third most commonly used electronic payment method for retail transactions (5.6 billion items, which does not include cash concentration settlement transactions), the ACH carries more than three-quarters of all electronic payment value ($5.67 trillion).

"If you compare these results with 1979 research estimates it seems clear that the proportion of check payments is declining as substitution for electronic payment instruments accelerates", according to Cathy E. Minehan, president of the Federal Reserve Bank of Boston. "Not only do we have a much better idea about the size of the total retail payments system, we clearly see that electronic payments are taking a strong hold of the market and are poised for significant growth in the next few years." The Fed anticipates repeating the study every two-to-three years providing detailed information on changing behaviors and trends in the use of payment instruments.

According to Patrick K. Barron, first vice president of the Atlanta Federal Reserve Bank, "We are hopeful that these data and further details we will share with the industry in the future will enable all participants in the payment system to make more informed decisions regarding future investments in payments technology."

The Reserve Banks hired Boston-based strategy firm Dove Consulting to conduct the electronic payment study and Global Concepts and Westat, Inc. to execute the two check studies. The Federal Reserve Bank of Atlanta and the Bank Administration Institute conducted the last study of this type in 1979.

Additional details on the research studies are available on the Federal Reserve System's financial services website: www.frbservices.org.